(Bloomberg) -- The bonds sold by hyperscalers to fuel their artificial intelligence ambitions have become a drag on investor portfolios from London to Tokyo.
From falling prices and wider spreads to negative total returns, the debt is underperforming on almost every metric. The bonds are in the red on average, according to data compiled by Bloomberg, and rank among the worst performers in indexes this year.
As firms such as Meta Platforms Inc., Alphabet Inc., and Amazon.com Inc. ramp up borrowing to fund data centers and other AI infrastructure, they have tapped pools of capital worldwide. The wave of issuance has become a test of credit market depth, while growing unease over the scale of AI spending is hammering the shares of chipmakers and cloud-computing giants.
"The risk is that if there is some form of disappointment around AI capex, then we could see a reaction that won't be concentrated in just one market," said Rufaro Chiriseri, head of Europe fixed income at RBC Wealth Management. "It could be an issuer-specific story and has effects across other markets," added Chiriseri, who is underweight the tech sector.
Hyperscalers are technology companies that operate vast data-center infrastructure and invest billions of dollars in the chips, servers and networking equipment needed to power it.
About 79% of the sector's bonds sold since early 2025 are currently indicated at a wider spread compared to their first trading day, according to data compiled by Bloomberg. They have fallen 3.3 points from their issue price on average and are 1.4% down on a total return basis. The bonds are currently among the worst performers in every market they were issued.
Alphabet, Meta, Amazon and Oracle Corp. have issued more than $300 billion since the start of 2025, according to data compiled by Bloomberg. Close to $80 billion of the debt was issued in currencies including the British pound, the euro and the Japanese yen — and the borrowers became some of the biggest names in those indexes practically overnight.
In sterling, for example, Alphabet is the biggest non-financial issuer on the high-grade index. In Swiss francs, Amazon and Alphabet are among the four biggest borrowers.
Hyperscalers "had to issue in all currencies as the US dollar market, which is the largest credit market globally, can't absorb it. Some of them built up from zero bonds in those other currencies and that's going to put a lot of pressure," said Bryn Jones, head of fixed income at Rathbones Asset Management.
Technicals Drive Widening
Many investors had little choice about their exposure to hyperscalers' debt, particularly the passive funds tracking corporate bond indexes or portfolio managers that are constrained by benchmark weightings.
The latest bout of weakness in the sector has followed this month's $25 billion debt issue by Amazon.com, which featured some of the lowest oversubscription levels for a jumbo AI-related deal — coming at the start of what is typically a slowdown in corporate debt supply in the summer period.
"The current hyperscaler widening is a byproduct of the high-grade investor community trying to rationally price in an accelerating pace of issuance," JPMorgan Chase & Co. strategists including Nathaniel Rosenbaum wrote in a note to clients Tuesday.
Also this week, Goldman Sachs Group Inc strategists wrote in a note that credit's underperformance to equities was down to the "technical headwind" of rising AI-related issuance, while analysts at Barclays Plc warned against "chasing" wider spreads given "rising concentration risk."
Some of this sentiment has seeped into credit-default swaps, contracts that traders use to hedge their exposure or speculate of the creditworthiness of a borrower. CDS spreads of hyperscalers active in the bond market since the start of 2025 have widened comparatively more than the North American benchmark index this year, according to data compiled by Bloomberg.
Absorbing Supply
For some, the performance is something of a vindication.
"We have been pretty cautious in entering the space," said Jack Daley, portfolio manager at TwentyFour Asset Management, who has avoided many new issues. "The companies themselves are obviously very strong but it is balancing that versus the supply, and the market absorbing them," he said. "People will still look at them and say they are cheap for the rating, but they can stay cheap if the supply continues."
Concerns around the AI story and its impact on the credit market are also becoming increasingly evident outside the rock-solid hyperscalers. Data-center operator Prime Data Centers LLC has postponed a planned bond that would have been issued under Norwegian law.
To be sure, insurance companies remain far off reaching their concentration limits on the sector despite the hefty issuance, according to the JPMorgan strategists. Insurers have been among the strongest bids for corporate bonds, despite near-record credit spreads, as yields remain historically elevated.
"I'm not a scaremonger, I'm not saying they are going to default," said Rathbones' Jones of hyperscaler bonds. However, "it's simple demand and supply. You increase supply and the prices go down."
(Adds definition of hyperscalers in fifth paragraph, credit-default swaps performance in 14th paragraph)
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